Investors are eager to buy green bonds. But to make the right choices, they need to analyze not only the financials, but also the governing framework of a given bond and its fit with the overall sustainability of the issuing company.

We’re optimistic about the potential for environmental, social and governance (ESG)-linked bonds to help create a better, more sustainable world. But with the recent proliferation in different types of green bond issues, investors need to understand their differences (Display).

A table describes the four main types of ESG-linked bond structures and compares them across various features.

Green bonds are use-of-proceeds structures that began as a straightforward concept—bonds that were issued for a specific project or projects with an environmentally beneficial purpose. Since then, companies have issued new types of bonds to finance a range of green, social and sustainable projects.

The most recent innovation—the KPI-linked bond—incentivizes the issuing company to achieve higher ESG standards across the business, rather than to finance a specific project. Such initiatives give issuers considerable flexibility in raising capital on ESG-linked grounds.

The proliferation of ESG-linked bonds means investors need to be aware of the technical distinctions and to understand the investment implications of each ESG-linked class.